© 2019 leaseaccelerator inc. page 1 · 2020-04-14 · •recruiting •training •turnover •...


Today’s Presenters

© 2019 LeaseAccelerator Inc. © 2019 RSM .

Dennis CareySolutions Consultant

Bob MalinowskiSenior Director, Technical

Accounting Consulting


Today’s Agenda | Countdown to GASB 87 Compliance

1. What changes under GASB 87

2. How to begin and effectively manage the transition to the new lease accounting standard

3. How organizations can leverage technology to get compliant and stay compliant with an accurate, repeatable close process

© 2019 LeaseAccelerator Inc. © 2019 RSM .

© 2019 RSM US LLP. All Rights Reserved. © 2019 RSM US LLP. All Rights Reserved.

GASB STATEMENT NO. 87 OVERVIEW

© 2019 RSM US LLP. All Rights Reserved.

GASB Statement No. 87 Overview

This is what we are covering today

This is what we are NOT covering today


GASB Statement No. 87 big picture

• GASB Statement No. 87 (GASB 87) is a significant change in lease accounting and financial reporting.

• The new standard impacts nearly all governmental entities.

• Most leases will be recorded as a “right to use” asset on the Statement of Net Positon.

• Information technology systems can be significantly impacted and organizations.

• Implementation requires involvement throughout an entire organization―not just within accounting and finance departments.

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GASB 87 overview*

Lessee accounting• At the commencement date, a lessee shall recognize a lease liability at the present value of the

remaining lease payments and a lease asset based on the lease liability adjusted for certain items.• Over the lease term the lessee recognizes interest expense and depreciation expense relating to

amortization of the lease liability and asset.

Lessor accounting• At the commencement date, a lessor shall recognize a lease receivable and a deferred inflow of

resources.• Over the lease term, the lessor recognizes revenue related to interest earned on the receivable and

amortization of the deferred inflow of resources.

* For financial statements prepared using the current financial resources measurement focus, If a lease is expected to be paid from general government resources, the lease should be accounted for and reported on a basis consistent with governmental fund accounting principles.

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Effective date and transition

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• GASB 87 is effective for annual periods beginning after December 15, 2019.

• Changes adopted should be applied retroactively by restating financial statements, if practicable, for all prior periods presented.

• If restatement for prior periods is not practicable, the cumulative effect (if any) of applying the statement should be reported as a restatement of beginning net position.

• Leases should be recognized and measured using the facts and circumstances that existed at the beginning of the implementation period.

− This will require reassessment of lease term, discount rates and other potential assumptions related to each lease.

• Lessors should not restate the assets underlying their existing sales-type or direct-financing leases.

− Any residual assets for these leases should become the carrying values of the underlying assets.


Why is implementation difficult?

• Decentralized lease process

• Volume of data and documents to manage• Technical accounting requirements

• Determining discount rates• Reassessment of lease assumptions upon transition• Systems considerations• Lease and nonlease components• Identifying and accounting for embedded leases• New controls

• Resource constraints

Com

plex

ity

9

© 2019 RSM US LLP. All Rights Reserved. © 2019 RSM US LLP. All Rights Reserved.

TECHNICAL ACCOUNTING CONSIDERATIONS


Scope• A lease is defined as a contract that conveys control of the right to use

another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.

• GASB 87 does not apply to:⁻ Leases of intangible assets⁻ Leases of biological assets, including timber, living plants, and living animals⁻ Leases of inventory⁻ Contracts that meet the definition of a service concession arrangement ⁻ Leases in which the underlying asset is financed with outstanding conduit⁻ debt, unless both the underlying asset and the conduit debt are reported by⁻ the lessor.⁻ Supply contracts, such as power purchase agreements.

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Scope – regulated leases

• GASB 87 does not apply to lessors for certain regulated leases, for examples, leases between airports and air carriers, if external laws, regulations, or legal rulings establish all of the following requirements:a. Lease rates cannot exceed a reasonable amount, with

reasonableness being subject to determination by an external regulator.

b. Lease rates should be similar for lessees that are similarly situated.

c. The lessor cannot deny potential lessees the right to enter into leases if facilities are available, provided that the lessee’s use of the facilities complies with generally applicable use restrictions.

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Lease term

Lease Term

• Any non-cancellable periods• Periods covered by an option to extend the lease if the lessee is reasonably

certain to exercise that option• Periods covered by an option to terminate the lease if the lessee is reasonably

certain not to exercise that option• Periods covered by a lessor’s option to extend the lease if it is reasonably

certain, that the lessor will exercise that option • Periods covered by a lessor’s option to terminate the lease if it is reasonably

certain that the lessor will not exercise that option.

Lease term includes:

• Periods for which both the lessee and the lessor have an option to terminate the lease without permission from the other party (or if both parties have to agree to extend) are cancelable periods and are excluded from the lease term.


Short-term leases

• A short-term lease is a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised.

• Short-term lease are not recorded on the statement of financial position as a right to use asset and lease liability.

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Lessee accounting: Discount rate

• Lessees:

⁻ Lease payments should be discounted using the interest rate the lessor charges the lessee, which may be the interest rate implicit in the lease. .

⁻ If the interest rate cannot be readily determined by the lessee, the lessee’s estimated incremental borrowing rate should be used.

− Incremental borrowing rate is defined as “an estimate of the interest rate that would be charged for borrowing the lease payment amounts during the lease term.”

• Lessors:

⁻ Lease payments should be discounted using the interest rate the lessor charges the lessee, which may be the interest rate implicit in the lease.

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Embedded leases

• Certain arrangements that are not structured as leases may contain embedded leases.

• Types of contracts that often contain embedded leases include:− IT and office equipment − Medical equipment contracts− Advertising− Logistics and warehousing

• If a contract contains a lease, it does not automatically indicate that the entire contract is a lease, i.e., it may also contain nonlease components.

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Embedded leases (cont.)

• A contract contains a lease if it conveys control of the right to use the underlying asset. To make this determination, a government should assess whether it has both:

− the right to obtain the present service capacity from use of the underlying asset as specified in the contract; and

− the right to determine the nature and manner of use of the underlying asset as specified in the contract.

• A lessor’s substitution rights do not preclude a contract from containing a lease.

− Substitution with an essentially identical asset allows the lessee to maintain control of the right to use the service capacity of another entity’s underlying asset and does not violate the definition of a lease.

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GASB 87 Implementation key activities and deliverablesProject management• Project plan detailing the activities and estimate due

dates of completing• Ongoing agenda and coordination for project

meeting• Periodic project status updates • Periodic project economics update • Coordination with various team members and

external auditorsTechnology vendor selection

• Evaluate business requirements , organizational readiness & process changes required for new lease technology solution

• Provide summary of vendors optimal for the company.• Facilitate vendor demonstrations; review software contracts

and pricing, and negotiate terms• Technology impact assessment, including key findings and

recommendations to be addressed during implementation• Implementation roadmap

Business processes• Future state lease processes• New general ledger accounts to track information

required under GASB 87• Future state financial reporting process flow

Data abstraction• Completed abstraction template that can be imported into

the chosen lease technology solution• Preparation of non contract template to be completed for

abstraction• Practical expedient elections; current/transition

accounting decisions based on types of leases

Accounting and financial reporting• Future state accounting policies• Transition/Implementation memo• Development of the quantitative and qualitative

disclosures• Assistance with specific topics such as portfolio

approach, management estimates etc.• Preparation of calculation and adjustments post

abstraction

Embedded leases• Embedded lease service arrangement survey to identify

different types of service arrangements that exist.• Embedded lease questionnaire • Sample service contract analysis for embedded leases• Preparation of data needed for abstraction, if embedded

leases are identified

Training• New lease standard training • Training on templates required to be populated for RSM’s review • Lease technology solution training• New processes and controls training

19www.leaseaccelerator.com

ENTERPRISE LEASE ACCOUNTING

How organizations can leverage technology to get compliant and stay compliant with an accurate, repeatable close process..

DAY TWO CHALLENGES

LEASEACCELERATOR


The Controller’s ChallengeCreating an accurate, repeatable, accounting close process

Started as an Accounting ProblemBecame a Data

Problem

Now a Lease Management Problem That

Requires Automation


Ongoing Compliance - Key Issues

CENTER OF EXCELLENCE QUARTERLY CLOSE

INTERNAL & EXTERNAL AUDITSSYSTEMS & DATA

LEASE ADMINISTRATION

VALUE & COST SAVINGS

• Talent• Recruiting• Training• Turnover

• Subledger Cutoff• Cycle Time• New Disclosures

• Software Upgrades• Regression Testing• Data Integrity across

Systems

• New Leases• Changes to Leases• End of Term Decisions• Reasonably Certain

• Cost Savings• Performance

Management• Financial Position

& Ratios

• Completeness• Accuracy• Policies and Controls• Statutory Audits


Lease Accounting Costs and RisksTime toClose

FinancialRestatement

AdditionalHeadcount

Spreadsheet-Based AccountingManual Processing

AuditCompliance

ImplementationDeadline Risk

Spreadsheets lack testing, version control, backups

No audit trail for decisionsLacking supporting documentation

Manual rollup of spreadsheets from business units

Reconcile general ledger and subledgerResearch discrepancies

Spreadsheet calculation errors

Incorrect application of new standards

Missed modifications or reassessments

Lease data abstraction

Training of existing personnel

New hires with lease accounting expertise

Incomplete lease data collection

Insufficient testing window

Transition accounting

KEY RISKS AND COSTS

1

2

3

4

5


Lease Accounting Standards - Challenges

ENTERPRISE LEASE ACCOUNTING PROCESS

Financial and Compliance

Audits

Remeasurementsand Modifications

(Lease Accounting)

Quarterly and Annual Financial

Disclosures

Initial Recognition and Measurement

Collection ofOperationalLease Data

Judgments, Elections, Lease

Classification

Data AbstractionLease

Contracts

Review of each lease agreement to collect up to 100 pieces of data – Base/Variable Rent; Payment Timing/Frequency; etc

Interview managers in real estate, fleet, IT, operations to collect additional data – Reasonably Certain End of Term Plans

Apply for each individual lease (or category of leases –Lease Definition

New hires or training of personnel on specialized standards

End of quarter roll up of data from each business unit or region – Cutoffs, Reconciliation, Discrepancies

Perform quarterly verification of all leasing data. Identify changes – Buyouts, Returns, Expansions, Subleases

Collect leases, policy elections, audit trail, calculations –Purchase Order, Invoice, MLA, Schedule

EXPENSIVE2-4 Hours Per Lease to collect data

HEADCOUNT/BUDGETNeed leasing expertise. Possible new hires.

TIME-TO-CLOSERisk of delay to SEC filings due to time to close leasing

RESTATEMENTDue to missed changes/ end of lease terminations

NON-COMPLIANCELack of controls –spreadsheets and documentation

ERRORSIncorrect calculations in spreadsheet leads to accounting errors

EXPENSIVE1-2 Hours per Lease to research data


Lease Accounting without Administration?

New Leases Middle of Term Lease Changes End of Term

New Traditional LeaseEmbedded Leases

Sale-LeasebackNew Sub-Lease

Variable Rent ChangeFloor Space Expansion

Sublease ChangeVendor Change

Partial Buyout or ReturnLocation Change

Cost Center ChangeUser Change

Termination/ReturnRenewal/ExtensionPurchase/BuyoutMonth-to-Month

A 1,000 Lease Portfolio will have 700 Changes Per Year


Post-Adoption Challenges

Avoid FinancialRestatement

Manual rollup of spreadsheets

Reconcile general ledger and subledger

Research discrepancies

Spreadsheet calculation errors

Incorrect application of new standards

Contract level approach for partial lease events

Lease data abstraction

Training of existing personnel

New hires with lease accounting expertise

Maintain Time to Close

AdditionalStaff

Ensuring the Accuracy of Accounting and Financial Reporting


Events throughout the Lease Lifecycle

RENTCHANGES

OTHERCHANGES

END OFTERM

REAL ESTATELEASE

CHANGES

EQUIPMENTLEASE

CHANGES

Change from Variable to Fixed

EarlyTermination

Floor SpaceContraction

New Sub Lease

Floor SpaceExpansion

LeaseholdImprovements

Impairment

Partial Termination(Asset Removed)

Lost or Stolen

Early Buyout

Early FullTermination

Evergreen

PartialRenewal

Buyout

Termination

Renewal

LEASEDASSET

New AssetAdded

Change toResidual Value

Change toBusiness Plans

LocationChange

Cost CenterChange

LEASE

CPI

LIBOR/SOFR

PerformanceBased


The Accounting CloseFOREIGN EXCHANGE

INTEREST COVER

EVENT PROCEDURES

Discount Rates

IMPAIRMENTS

SUBLEDGER CUTOFF

CENTER OF EXCELLENCE

PRIOR PERIOD ADJUSTMENTS

GL RECONCILIATION

ADJUSTING ENTRIES

CONTROLFRAMEWORK

DETECTIVE CONTROLS

RETURN ON ASSETS

DISCLOSURES

GL UPLOAD

NEW COST CENTER

MODIFICATIONS AND REASSESSMENTS

TRIALBALANCE

INTERCOMPANY2020

CLOSE CALENDAR

NEW LEASES

EXPIRED LEASES

RENTCHANGES


The Leasing Center of Excellence

Testing of embedded leases for inclusion. Identification of short-term, immaterial, financed purchases.

LEASEDEFINITION

Subledger cutoff. Reconciliation and adjusting entries. General ledger upload.

MONTHLY CLOSE

Rent and contractual changes. Reasonably certain end of lease plans.

MODIFICATIONS & REASESSMENTS

Classify and record initial journal entries after assessing commencement, term, payments, reasonably certain plans, discount rates.

INITIAL RECOGNITION & MEASUREMENT

Recording of journal entries to reflect end of lease renewal, termination, or purchase.

END OF LEASE RECORDATION


GASB 87

Developing a Training Strategy

Who?• Center of Excellence• Asset Users

How?• Online • In Person Classroom

What?• Business Impacts• New Software• Process Changes• Policies and Controls


Three Golden RequirementsFor an Enterprise Lease Accounting Solution

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Lease Policy Management

Lease DataManagement

LeaseAccounting

ü Completeness & Accuracy

ü Existence or Occurrence

ü Rights & Obligations

ü Valuation or Allocation

ü Authorization

ü Completeness & Accuracy

ü Existence or Occurrence

ü Authorization

ü Presentation & Disclosure

ü Valuation or Allocation

Financial controls and flexible workflow to enable the management of lease and accounting policy and ensure SOX and FASB compliance. • Lease vs. Buy• Lease Accounting Classification

Manage and track all changes to the leasedasset as those changes occur to insure anaccurate “system of record” for accountingcompliance.• Mid-Term changes• End-of-Term changes

Perform accounting calculations and journal entries at the asset level. Manage the accounting for individual business needs to ensure complete and accurate accounting • Financial Accounting• Management Accounting


Questions?

Dennis CareySolutions [email protected]

Bob MalinowskiSenior Director, Technical Accounting ConsultingRSM US [email protected]

THANK YOU

www.leaseaccelerator.comwww.rsmus.com

© 2019 leaseaccelerator inc. page 1 · 2020-04-14 · •recruiting •training •turnover •...

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